Back To Basic Banking

Old Point Asked To Boost Reserves, Focus On Cash Flow

March 29, 1992|By DAVID RESS Daily Press

HAMPTON — A lot of bankers these days see bank examiners as the terrorists from Washington. But Old Point National Bank Chairman Robert F. Shuford says his bank's recent five-week exam felt more like a seminar on new banking trends.

Old Point's examination by federal regulators, its first on-site inspection in nine years, had a high price tag for the locally owned bank.

As a result of discussions with examiners from the Office of the Comptroller of the Currency, Old Point added an extra $1.4 million to its reserves for doubtful loans, a move that slashed 1991 profits by 40 percent. Shuford said the bank plans to sock away another $800,000 during the first quarter of 1992, $500,000 more than executives had originally budgeted.

Old Point, which started 70 years ago in the back of the old Cooper Confectionery Store in Phoebus, has grown to a $266 million, 14-branch bank with a statewide reputation for conservatism and solidity. All its loans are made on the Peninsula and virtually all its deposits come from here.

But the Peninsula was hit hard by the recession in 1991.

And one result is that some folks have a hard time keeping up payments on their loans.

That's what was worrying the bank examiners when they came calling on Old Point, Shuford said. The examiners felt Old Point had on its books more loans at risk of going sour than Old Point executives had thought they had.

The federal examiners have been saying the same thing to hundreds of banks over the past two or three years.

Bankers across the country complained that regulators were going overboard in a tough regulatory crackdown that, they say, has slashed their profits and caused a nationwide credit crunch.

For many, the most galling thing of all is the demand by banking regulators to treat as bad loans accounts on which a borrower is still paying interest and principal.

However, Shuford said he wasn't galled. He was interested in why examiners looked at some loans that way.

``One of the chief things they were looking for in loans is cash flow and documentation of cash flow,'' Shuford said. So that means cash flow will be the chief thing Old Point loan officers will be looking for in the months to come, he said.

Shuford believes that's been the pattern emerging across the country over the past year.

It means a shift from the banking style of the 1980s, when collateral and character alone carried a lot of borrowers, Shuford said.

That collateral-oriented approach fueled a massive move by banks into real-estate lending. That move was based in large part on the assumption - recently proven wrong, as many Virginia banks have found - that real estate prices only move one way - up. Bank analysts say that assumption was just as wrong as another assumption many banks made: that there would always be tenants for new office space and buyers for new houses.

Looking at cash flow - whether a borrower is making enough money to make payments on his or her loan - means a lot more number-crunching for Old Point loan officers, Shuford said.

That's one of the key changes Old Point customers are likely to see in the months to come.

Another is a demand for paperwork. Shuford said bank officers are going to want to see detailed financial statements, business plans and projections.

Other changes, said bank President Robert S. Kenerley, include a new loan review team to systematically monitor loans and make sure they meet the new, cash-flow oriented standards the examiners favor.

If they find a problem, then bank officers and borrower have to sit down and and figure out what to do next. In many cases, all that's involved is getting the borrower to provide more information. Calling a loan in is only a last resort for an otherwise unsolvable problem.

Old Point is also beefing up its management information systems - the computers and software it uses to track day-to-day transactions - and is implementing new guidelines on appraisals of property used to secure loans, Kenerley said. The guidelines, among other things, decide when a licensed appraiser needs to be called in to evaluate a property.

Old Point has hired an outside consultant to review all the loans that comptroller's office examiners did not look at - roughly 70 percent of Old Point's total loans - just to make sure there are no problems out there, Kenerley said.

``We are taking this step to send a clear signal that we are totally committed to excellence when it comes to asset quality and the future earnings of our bank,'' Kenerley said.

But the bottom line, said Shuford, is that the bank is as willing to do business as ever.

He said he's not sure it will mean tighter credit, overall. But there may be a shift away from commercial real estate lending and more of a push to make business loans, Shuford said.

However, loans to consumers - from home mortgages to student loans to home-equity lines of credit - will remain Old Point's bread and butter business, he said.

Shuford figures that's a healthy trend, and is just as happy the federal bank examiners are pushing banks in that direction.

``It's getting back to basic banking,'' he said.

AT A GLANCE

* History: Started in a Phoebus confectionary shop 70 years ago; now has 14 branches.